NY futures closed slightly lower this week, with December giving up 62 points to close at 65.24 cents.

It was yet another uneventful week, during which the market tried to get something going on both sides but ended up not too far from where it had started. The following stats show just how entrenched the market is in its current sideways trend. Since September 22, 2014, the December contract has closed 186 sessions (90% of the time) between 63.00 and 67.00 cents, 15 sessions (7.5%) below 63.00 cents and 5 sessions (2.5%) above 67.00 cents.

Not surprisingly the 50-, 100- and 200-day moving averages are completely flatlined at this point and remain nicely bunched together between 64.70 and 65.40 cents. As the market moves above or below these moving averages it may trigger some buy or sell signals, but so far that hasn’t generated any meaningful escape velocity. The 65.00 cents level, which marks the middle of this longer-term 63-67 cents range, seems to be the center of gravity at the moment and it will take a change in market perception to get us out of this boring sideways trend.

Speculators have spent a considerable amount of money in recent weeks to generate some upside momentum, but so far to no avail. The latest CFTC report, which covers the period from July 1-7, showed that speculators increased their net long position by another 0.6 million bales, bringing the two-week total to around 3.8 million bales net. The trade added 0.6 million as well to its net short positions, for a two-week change of 4.0 million bales net. We have yet to see how these positions have changed in the current week, but we can already surmise that speculators have hardly gained any ground since they have launched their assault on the cotton market on June 25.

Since throwing money at the maket doesn’t seem to do the trick, maybe we need to wait for a change in the supply/demand situation to generate some new momentum. Last Friday the USDA provided us with its latest set of numbers, which were perceived to be bearish by most analysts due to an increase in 2015/16 ending stocks of over 2.0 million bales.

However, as we have learned over the last four seasons, it is dangerous to look just at the global picture, since we live in a two-tiered cotton world these days. While Chinese stocks showed an increase of 2.5 million bales since the June report, due to a drop in mill use by the same amount, ROW (rest of the world) inventories were actually lowered by 0.44 million bales since last month. According to the USDA, stocks in the ROW are expected to decline from 44.08 million bales at the end of this season to 43.06 million bales in 2015/16. In other words, while China continues to drown in cotton, the ROW balance sheet is getting tighter.

In our opinion the most important price factor over the last four seasons has been the relationship between the ROW production surplus and Chinese imports. Since 2011/12 the ROW production surplus has been steadily declining, dropping from 27.5 million bales to just 12.1 million bales this season. According to the USDA this trend is likely to continue in 2015/16, with the ROW production surplus expected to shrink to a mere 4.5 million bales.

This is significant, because in 2011/12 it took 24.5 million bales in Chinese imports to keep the ROW ending stocks in check, while next season it will take only 4.5 million bales to neutralize the ROW surplus. Currently the USDA predicts Chinese imports at 5.75 million bales, which is why ROW stocks are expected to be drawn down next season.

Since Chinese values are still about 40% above world prices, the only way China could become a factor in the world market is if it were to export some of its large stockpile, which seems unlikely at this point. Paradoxically, the fact that the Chinese domestic market is uncompetitive promotes yarn imports and shifts mill capacity outside its borders. Vietnam is a good example for this trend, where the USDA has just raised imports by 0.8 million bales to 5.0 million bales in its latest report.

As a result of this exodus from China we have seen a rather impressive increase in mill use in the ROW, from 66.0 million bales in 2011/12 to 76.9 million bales this season. This trend is likely to continue in 2015/16, with the USDA expecting ROW mill use to rise to 79.9 million bales.

US export sales were once again a pleasant surprise, as 167’800 running bales were committed last week, whereof 59’900 running bales were for prompt shipment and 107’900 running bales were for August onwards. Shipments of 148’600 running bales were lower than in previous weeks, but that had to be expected since the pool of outstanding sales has dropped to just 977’800 running bales.

For the current season we now have commitments at 11.7 million statistical bales, of which 10.7 million bales have already been exported. For the 2015/16-season there have so far 1.8 million statistical bales been sold.

So where do we go from here? From a technical point of view the market is flatlined and has no momentum at the moment. Since speculators have thrown a lot of money at the cotton market in recent weeks, with prices at over 65 cents, holding this level is important since otherwise there will likely be some long liquidation.

From a fundamental point of view the supply/demand picture in the ROW is not expected to change much from this season to next. If anything we may see a slightly tighter ROW balance sheet. In the case of the US, ending stocks are projected at 4.2 million bales for both this season and 2015/16. However, if the US crop maintains its current potential for a bumper yield, it will probably lead to price pressure as we head into harvest, since sales are lagging behind previous seasons.

Since the market has failed to break out to the upside despite heavy spec participation, we feel that the next move is going to be to the downside for a test of the lower boundary of this 63-67 cents trading range.